Should I Buy an Annuity?

annuity think tankIf you have made it to this article, you are most likely either interested in annuities or already have one.  To start off, let’s define what an annuity is.  An annuity is a contract between the owner of an annuity policy and an insurance company.  The contract, in general terms, is an agreement where the contract owner pays a premium to an insurance carrier in exchange for a guaranteed periodic payment.  Keep in mind that different annuities accomplish different goals so the definition above is very broad in terms of its meaning.

 

You may have heard a lot of speculation about annuities and if they are a good investment or if you should run for the hills.  I have found that often times the answer is dependent upon who you ask.  You may know someone who had a bad experience with an annuity or you may know someone who is very satisfied with their annuity.

 

The question of should you buy an annuity relies upon your retirement goals.  Unfortunately, often times when you hear of a bad experience with an annuity, it is because the advisor either didn’t understand the client’s goals or they didn’t understand the product they were selling.

 

An annuity can provide a safe retirement with guaranteed income for life.  Annuities in general are not high performing products with large returns and if you run into a situation where you are told you can get double digit returns, then that product is most likely not being understood correctly.  If we think back to our finance classes…we all remember – the higher the risk, the higher the return.  If we know this to be true, then by nature an annuity, which is a very low risk investment can’t possibly return very high returns.  The insurance companies make their profit by taking the policy owner’s premium and investing it at a higher return than they pay out.

 

We also want to remember that annuities have contractual guarantees.  They have guarantees in place and you should consider buying an annuity based on these guarantees.

 

If you are looking at a fixed-indexed annuity, you might be wondering what the non-guaranteed values are.  Remember that the non-guaranteed values are exactly that…Non-Guaranteed!  They are based on the historical values of the product and in the future may perform better or may perform worse.

 

If you are looking for a way to retire safely and are willing to sacrifice some returns for the downside protection then an annuity may be a good fit.  If you decide that you could benefit from an investment that is safe and has contractual guarantees that you will never outlive your money then make sure you do some research on the products you are presented.  Remember that you’re not going to “hit a homerun” in terms of returns with an annuity, but you can ensure that you have a safe and low-risk retirement.  Ask your advisor to explain to you exactly how the products work and be sure that you understand what you’re buying and then you will know if you should buy an annuity.

The articles displayed in RetirementThinkTank.com are for educational purposes only. Be sure to seek out personalized guidance from a licensed advisor/agent in your state for your insurance, investment, or tax planning needs.

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